Brexit and the economy

Chris Giles, Economics Editor at the Financial Times speaks to Owen McQuade about the post-Brexit economic projection.

In the wake of the Brexit vote, the economic data has been better than anticipated, states Giles. “The data is better than forecast and that means that the worst predictions – that we would have a financial crisis and a complete loss of confidence in the UK economy – were wrong and that consumers and households have carried on pretty much as if nothing has happened. Incomes have continued at the same level and nothing has fallen off a cliff.

“That doesn’t mean in the short-term we see prices rising because of the fall in sterling and if companies stop, or limit, investment that will be quite so easy in the months ahead. The jury is still out on the short-term but the crisis didn’t happen immediately as many had predicted.

“Looking forward into the longer-term, inflation is going to rise and squeeze incomes because sterling has fallen against our main trading partners’ currencies. That is very unlikely to be matched by increases in wages. “Therefore we are likely to see consumption grow slower or maybe even decline depending on how much impact price rises get passed on to consumers. The big question for the economy is business investment. We have had no evidence of this yet apart from some foreign investment deals and some signs of caution from businesses in new domestic investment. That is going to be a big determinant as to how slow the economy is going to be next year.”

During his presentation to this year’s Northern Ireland Economic Conference, Giles used the analogy of the Brexit referendum’s impact on the UK economy as being similar to putting sand into a gear box. When asked how much sand does he think will get into the UK economy’s gearbox, he adds: “Some sand will go in because the mechanics of our relationship with the rest of Europe are clearly going to become more difficult than when we were an EU member, but that is entirely dependent on the deal we do with the rest of the EU. If we do a deal where there is a long interim period so we don’t see sudden drops in migration or sudden customs checks on all of the UK borders, particularly here on the Irish land border, and we don’t see sudden massive changes in the UK regulations being very different from the rest of Europe, then we can say we might not be changing a huge amount. But if we have a very hard, sudden stop, where we just become an economy outside the European Union with no deals at all – a country rather like Australia or the US – then that will be very difficult for British businesses and companies. It means that a lot of the way they do business will have a change.”

“the assessment of Britain leaving the EU is a much more difficult calculation, ranging from a little negative to very negative depending on the outcome.”

When asked if he was happy with the quality of the current debate around Brexit Giles contends that the quality of dialogue around economic issues has been much better than the political narrative around Brexit. “Many are still putting huge efforts into trying to re-run the referendum debate. What we need to do now is to make it work and to think clearly about that. Although I have felt frustrated by the political debate, the economic debate has been rather good.”

While the economic forecasts have been adjusted downwards in the wake of the referendum vote no-one is forecasting negative growth. When asked if this is simply because they do not want to be accused of ‘talking down the economy’, he responds: “Economists did start off with very negative forecasts the day after the referendum. They have been slightly more positive as the data has been better than expected. These things are data driven. The medium-term isn’t as data driven and that is where the assessment of Britain leaving the EU is a much more difficult calculation, ranging from a little negative to very negative depending on the outcome. If we see companies, not necessarily cutting spending but, not investing in new projects and households beginning to tighten their belts throughout 2017 then we could see some big dips in forecasts.”

In relation to the longer-term prospects for a post-Brexit UK economy, Giles outlines: “In the longer-term, trade with and membership of the EU isn’t the only thing that makes an economy good or bad. Britain will be a reasonably strong and advanced economy in the long-term. My gut feeling is that it won’t be as strong as if we had have stayed a member and how much difference that is, is very much dependent upon making sure we get the best possible deal with the EU.”

This was Giles’ first visit to Northern Ireland and, pressed on his impressions of the local economy, he mentions the dominance of the public sector and asserts that re-balance will only be possible through “self-sustaining private sector investment”. The other issue he highlights is the “big issue of productivity”. “How do we get the people of Northern Ireland to be more productive by focusing on skills and inward investment as the levels of productivity have been lower than the rest of the UK, where productivity is also an issue,” he concludes.